Hudco IPO lucrative, but asset quality concerns remain

THE GOVERNMENT AIMS TO SELL 10.19% STAKE IN HUDCO TO RAISE UP TO ₹1,200 CR. HUDCO IS PRIMARILY PROVIDES LOANS FOR HOUSING, URBAN INFRA PROJECTS

MUMBAI: Ahead of the opening of the initial public offering (IPO) of Housing and Urban Development Corp Ltd (Hudco) on Monday, analysts were upbeat about the company’s valuations, even as concerns on bad loans remain.

In a 5 May note, Reliance Securities Ltd said at ₹60 a share, the upper end of the IPO price band, Hudco will have a price-to-book (PB) multiple of 1.3 times on December 2016 book value, and price to earnings (PE) multiple of 18.2 times on annualised ninemonth FY17 profit.

Urban infra projects relating to water supply, roads, transport and power account for 69% of Hudco’s loan book. The balance 31% goes to housing finance.

“Both segments have vast untapped opportunity in India, which would provide potential growth opportunity for Hudco to scale up its operations,” Angel Broking Pvt Ltd said in a note on May 4. According to the brokerage, capital adequacy ratio of 68% at the end of nine months of FY2017 leaves enough scope for leveraging balance sheet without having to raise capital for next 4-5 years. It reported a return on equity (RoE) of 9.5% for FY2016, which is lower than the large nonbanking financial companies in India.

“Ability to grow its balance sheet without dilution in the medium term would prove to be RoE-accretive for Hudco, and it can reach mid-teens over the next few years,” Angel Broking added.

According to IIFL Wealth and Asset Management Ltd: “Being substantially capitalised and commanding highest credit rating, Hudco can raise long-term money at best possible rates from the bond market.”

Given the reasonable visibility for steady asset growth and better return ratios, the IPO valuation at 1.4-1.5 times’ nine months FY17 PB seems attractive,” it said.

However, SBICAP Securities Ltd, in a note on May 2, said interest rate volatility could affect net interest income and net interest margin, affecting operating efficiency and its business. It also added that quality of loan portfolio deteriorating may result in increasing non-performing assets (NPAs) and hence provisions would increase.

Hudco reported gross NPAs — loans that do not yield returns — and net NPAs of 6.80% and 1.51%, respectively in the first nine months of FY2017.

According to Angel Broking, Hudco has already made substantial provisions on the private sector NPAs and stopped lending to them from FY2013, and hence, material change is not expected in NPAs in the near term.